Central Banks Catch Gold Fever

March 22, 2011

At WealthCycles.com, one of our favorite factors driving gold’s rise over the past couple of years has been increased interest in a truly safe asset by central banks around the world. It’s an interesting phenomenon because all these central banks have dirty secrets, but it’s becoming apparent that they may be willing to throw each other under the bus if it means saving their own hides. It’s like best friends with pinky-sworn promises of loyalty are beginning to stab one another in the back.
While individuals are making no secrets about buying precious metals, central banks and sovereign nations have taken to being a little more discreet with their grumbling over the dollar’s slowly slipping grip on world trade. While we have heard of countries complaining about the dollar, it shouldn’t come as a surprise that Iran has been secretly buying gold for years.
According to Wikileaks’ cables and the Financial Times, Iran has been secretly purchasing gold for the past decade, making it one of the top 20 largest holders of gold reserves in the world. The Wikileaks cable, as described by the Financial Times, details conversations between Andrew Bailey, head of banking at the Bank of England, and an “American official” indicating that Iran had beefed up its holdings to more than even the venerable United Kingdom.
“They estimate it holds more than 300 tonnes of gold, up from 168.4 tonnes in 1996, the date of the most recent International Monetary Fund data.”

But then the Financial Times includes this piece of interesting information:
“Last year, central banks became net buyers of bullion after 22 years of large sales, helping drive gold prices to all-time nominal highs. Trades by central banks are often kept secret.”
Iran’s secret purchases were likely off-exchange, meaning that buyers and sellers in the gold market never received the information that a big buyer was coming to town. While Iran undoubtedly took gold supply off the table, the effect that its purchase had on price was muted by its secrecy.
According to the article, other nations like Qatar and Jordan are following Iran in trying to get away from the dollar.
The big-picture implication is that oil producing nations no longer are just saber-rattling, but are actively drawing their U.S. dollar exit strategy. This is important because part of the biggest reason that the U.S. has maintained its “exorbitant privilege” of dollar reserve currency-status is that the global oil market has been priced in dollars. As the Middle East becomes less willing to accept and hold U.S. dollars, the great gold rush, by individuals and central banks is likely to get into full swing.